Tuesday, November 11, 2014

Incentives, Downsizing, and Value Creation at General Dynamics (August 1994 Paper)

This looks like an interesting paper, and it reminded me of THIS previous post/quote.

In 1991, defense contractor General Dynamics engaged a new management team which adopted an explicit corporate objective of creating shareholder value. The company tied executive compensation to shareholder wealth creation, and subsequently implemented a strategy that included downsizing, restructuring, and exit. Paying large executive cash bonuses amid layoffs ignited controversy. However, by 1993 shareholders realized gains approaching $4.5 billion, representing a dividend-reinvested return of 553%. The study shows how incentives assist in shaping strategy, illustrates the political costs and economic benefits of downsizing, and demonstrates that even firms in declining industries have substantial opportunities for value creation.